Confirmation of Integrated Allocation knowledge

[buckaroo]

I have a client with a SH 401(k) plan. They staisfy the SH via the SHNEC. The Plan also has a profit sharing allocation as an integrated allocation of 81% of the TWB. They want to "Max out" the HCEs who make 230,000.

Questions

1) My understanding is that if this were a non SH plan (standrad 401(k) plan), the regular PS allocation would be considered a design based safe harbor as far as 401(a)4 is concerned. (As long as the integration portion does not exceed the 5.4% on the excess and is not more that than the % on the base. For example 7% on base comp and 5.4% of comp in excess of the 81% of the TWB.) Correct?

2) Because it is a safe harbor, each person is required to receive the 3% SHNEC first and then the integrated allocation of 7% on base plus 5.4% on excess. This combination allocation requires 401(a)4 testing as it is now not a safe harbor allocation design. (There are people who are not getting the "uniform" allocation soely under the permitted disparity formula.) Correct?

3) Based on #2, this plan fails the allocation method of 401(a)4. Therefore, the plan must be cross tested to ensure passage. Therefore, those employees who have qulaified for the SHNEC and not the integrated NEC would have to receive an additional allocation to ensure that they meet the gateway contribution. Correct?

Any responses are greatly appreciated

[Blinky the 3-eyed Fish]

Technically you may be correct that it's not a safe harbor design. The safe harbor has no accrual requirements and the nonelective does. It's possible for someone to just get the 3% safe harbor and nothing else. I liken this to a top heavy plan where someone is employed on the last day and received the top heavy minimum, yet doesn't work the hours to get the nonelective contribution. However, while there is a special provision to not treat the person who received the TH minimum as benefiting and still pass 410(b), there is no such correlating rule for someone who just receives a safe harbor contribution.

Logic states that the same concept should apply to both situations and one may want to take that position to preserve the safe harbor design status.

But if you don't want to be that aggressive and want to pass 401(a)(4) using the general test, remember too that you can pass on a contributions basis. Chances are very high that if you could pass coverage not treating the safe harbor only people as not benefiting, you can pass the general test on a contributions basis. No gateway is required when testing on a contributions basis.

[buckaroo]

Blinky,

Thanks for the reply. I always welcome your input. I thought about excluding (from coverage) those who receive only the SHNEC, but I felt uncomfortable doing so. So I included them in the testing. Either way, most of the HCEs have an allocation percentage of 15.789 (13.261 prior to imputing disparity) and most of my NHCEs have an allocation percentage of 15.501 (9.801 prior to imputing disparity). (The "raw" allocation percentages include the 3% SHNEC.) Therefore, I cannot utilize the allocation methodology. I had to convert to EBARs and test on a benefit basis. Based on this, I had to provide the gateway minimum to those who only received the SHNEC.

From my review this makes sense as the 3% SHNEC cannot be "imputted upon" and the formula calls for utilizing 81% of the TWB.

Any additional thoughts would be welcome.

[Blinky the 3-eyed Fish]

You are not excluding from coverage those only receiving the SH, you would instead be treating them as not benefiting, then see if you pass 410(b). If you do, the design in of itself is a safe harbor design.

But like I said, doing this is not anywhere in the regs/code that I know of because that rule for top heavy was written long before safe harbor 401(k) plans existed.

If you are uncomfortable with that, then I agree with what you said.

[Kevin C]

What kind of plan document is it? If it is a standardized prototype, the opinion letter will reference 401(a)(4). If it is a GUST version non-standardized safe harbor prototype, it will have something similar in the opinion letter.

[buckaroo]

Thanks again. I typed when I said exclude. I meant not benefitting, non-excludable for 410(b).

Even if I did this, my apologies, but I want to confirm that I fully understand that it would still be considered a safe harbor design. All employees are getting the 3% SHNEC and then getting 6.801% of total comp and 5.4% in excess of 81% of TWB. Are you saying that essentially it is akin to using a two step integrated allocation where you are giving 5.4% of total plus excess of 81% of TWB and then giving 4.401% on total comp? Is this correct?

My issue may then be a software issue. The system I am running is telling me that based on the information I have fed it, that it is failing 401(a)4 on an allocation basis based on the numbers below. I think that it has to do with the reduced integration level (81% of TWB), but I will have to verify.

Thanks for your help.